Universal Life Insurance

Experts agree universal life insurance is the affordable alternative to whole life insurance.

But is universal life right for you, and how does it work?

… or perhaps you’re just looking for the best pricing, or how to save the most money.

What is Universal Life Insurance?

Universal life insurance is a form of permanent life insurance that may provide life insurance protection along with the benefit of flexible premiums, and cash value buildup, similar to the savings element in whole life insurance.

That means when a premium is paid, a portion of the premium pays the actual cost of life insurance, and the remainder of the premium is applied to a sort of built-in savings account in the policy known as the “cash value.

The cash value account may earn a fixed interest or be credited with earnings based on the performance of major world indexes such as the S&P 500. Since cash value is present, the owner may be able to miss payments for a year (or several years).

Lastly, policies from the best universal life insurance companies may provide coverage for life if cash values are high enough to sustain the ongoing cost of insurance.

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​What Are The Types Of Universal Life Insurance?​

Indexed Universal Life

Indexed universal life insurance links the cash value to the gains of a stock index such as the S&P 500. (For more information, read our “What is Indexed Universal Life Insurance?“).

Your money avoid losses and is always protected.

Just remember that your interest crediting moves with the specific index that your policy is attached to.

Guaranteed Universal Life

Guaranteed universal life insurance is a hybrid of term and whole life insurance that is designed to last your entire life.

A few key characteristics are:

• Rates won’t increase and you’ll always have a guaranteed death benefit as long as the premiums are paid on time
• Similar to a term life insurance policy that lasts for your whole life instead 10,  20, or 30 years
• Policies are priced to specific ages like (to 90, 94, 100, or 115).

This is a relatively new type of policy and it is really popular and can save you lots of money, especially for people over the age of 60.

Variable Universal Life

Variable universal life insurance is a type of permanent life insurance that allows you to manage different types of mutual funds directly through “separate accounts” with the cash value that your policy has built.

The performance of your variable universal life policy will depend on the performance of the mutual funds you are managing.

Depending on your policy performance some months you could have $0 premium payments while at other times you could owe the max per month permitted by the IRS.

This really can come in handy or be huge mistake, we wouldn’t recommend this type of policy unless you want to be actively involved in your life insurance at the least on a monthly basis.

Pros of Universal Life Insurance

The pros of Universal Life insurance include:

• Flexibility
• Interest Strategy Choices
• Permanent Coverage
• Cash Value Safety Net
• Flexible Payments with Cash Value
• Tax Deferment

Flexibility. If your financial circumstances tend to fluctuate, you can choose to pay either higher or lower premiums. Even if your economic circumstances are rock solid, you can opt to pay a lower premium when the market is performing poorly and up the premium when the market is bullish to make more of your interest crediting strategy.

Interest Strategy Choices. You aren’t forced to blindly accept where the cash accumulation portion goes, because the insurance company will give you several strategy options. You may pick an equity index strategy, a guaranteed one year term deposit, or a general interest account based on current rates.

Permanent Coverage. You get coverage for your entire life, as long as you keep up with the premiums.

Cash Value Safety Net. As you increase the value of the policy over time, you might wonder what happens if you get jammed up financially. Will you have to cancel the policy to get the cash value?  No, you can keep the policy in force and your family protected at the same time. You can borrow or even withdraw the cash value you have built up to date and retain not only the unused portion of the cash value but the availability of death benefits.

Flexible Payment with Cash Value. The flexibility of the cash value is a big advantage.

Say your minimum premium is $50 per month.

Scenario A: You can send in $50 every month for your whole policy and you’ll have your coverage.

Scenario B: You might decide to send in $100. The first $50 goes to paying your insurance costs: cost of insurance, premium fee, administration fee, etc.  The other $50 bucks goes into your cash value account.

The cash value account works similarly to a Roth IRA.  The idea is to stuff it full of cash and let it accumulate in the early years so you can pay lower premiums or no premiums in the later policy years.

Eventually, you’ll have enough cash in your policy, that at some point you can stop making premium payments.  The insurance company will then take the cost of insurance out of your cash value, and as long as there are sufficient funds, you no longer have to make premium payments.

Tax Deferment. Both the cash value investment portion and the death benefits are tax deferred which means the IRS will not bother you when there is a payout. However, if you borrow against the cash accumulation account, you have to take the funds as a loan to enjoy this benefit, which means you will incur interest.

Cons of Universal Life Insurance

The cons of Universal Life Insurance include:

• More Expensive than other types of polices
• Mortality Cost
• Repayment of Borrowed Cash Value
• You Have to Monitor Your Cash Values
• Interest Rates are Conservative

More Expensive. Universal Life insurance costs a lot more than other types of life insurance policies in terms of premiums paid and fees, especially when you compare it to Term Life Insurance.  Universal life is usually 3 to 4 times the cost of term.

Even if you need permanent coverage, you can typically save about 20% by purchasing guaranteed universal life (which is like term to age 100+) instead of straight universal life.

Mortality Cost. Be cautious when choosing your policy, because some offer 2 options:

1. Level Cost of Insurance or “LCOI” – the amount of mortality payment never changes.
2. Yearly Renewable Term – the mortality portion of the premium will change over time.

It’s relatively cheap if you buy the policy when you’re younger, but gets progressively more expensive over time.

If your mortality expenses increase annually, you’ll want to be sure to request illustrations frequently to be sure your policy benefits are in good standing.

Alternatively, you may want to add a no lapse guarantee rider to your policy for whatever length you MUST have the policy in force, to ensure the premiums and the death benefit stays level for that period.

Repayment of Borrowed Cash Value. Although borrowing against the accumulated cash value is convenient, you have to pay it back. What’s even more inconvenient, the insurance company will charge you interest. Beware that borrowing money on some universal policies may also reduce your death benefit.

You Have to Monitor Your Cash Values. This is not the type of policy you want to just stick in the drawer and simply pay the premiums as they come due. You need to keep track of how your cash value account is doing, and frequently request in-force illustrations. If you’re a person that is not too savvy about investments, this may not be the best policy for you.

Interest Rates are Conservative. If you’re hoping to stuff premiums into your policy and treat universal life as an investment to make a lot of money, you may not get the yields you’re looking for, as interest rates are relatively conservative.

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Universal Life Insurance vs. Guaranteed Universal Life Insurance

Universal life is VERY different than the definition of guaranteed universal life.

Traditional Universal Life – “UL”

• may offer lifetime coverage
• allows flexible premiums
• builds cash value (values may be available for withdraw or loan)
• some people borrow/withdraw cash value funds for supplemental retirement income
• if premiums aren’t paid and there is no cash value available to pay the cost of insurance, the policy lapses (cancels)

We rarely recommend traditional UL, especially if you’re simply looking for guaranteed lifetime coverage.

Guaranteed Universal Life – “GUL”

• may offer lifetime coverage
• premiums are inflexible – typically must be paid when due or policy will be in danger of canceling
• there is typically little to no cash value available for withdrawing or loans
• a “no lapse” feature is added to these policies which guarantee the policy will not cancel, even if the cash value is ZERO (as long as premiums are paid)
• typically costs less than traditional “UL”

Universal Life Insurance vs. Whole Life Insurance

Universal life insurance is a form of Permanent Insurance, as it may offer lifetime protection, and is similar to Whole Life Insurance, but to be clear there are indeed differences regarding premium flexibility and guaranteed lifetime coverage.

Universal Life

In universal life, if you skip a premium, the cost of insurance is deducted from your cash value.

Standard universal life insurance policies typically “hope” to provide coverage for life (through age 100) but are rarely guaranteed to do so.

Much of the policy’s performance has to do with how much interest the cash value earns over the life of the policy (which typically is not guaranteed), and whether the owner withdrew/borrowed money from the policy during his/her life.

Whole Life

In whole life, if you skip a premium, the cost of insurance is borrowed from your cash value, establishing a loan.

If you pay your premiums, you’re guaranteed to have coverage for life, (assuming you don’t withdraw/borrow from the policy.)

• may offer lifetime coverage
• builds cash value (values may be available for withdrawing or loan)
• some people borrow/withdraw cash value funds for supplemental retirement income
• if premiums aren’t paid and there is no cash value available to pay the cost of insurance, the policy lapses (cancels)

We rarely recommend traditional ​whole life, especially if you’re simply looking for guaranteed lifetime coverage. Guaranteed Universal Life typically costs less than Whole Life insurance.

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Universal vs. Term

The big difference between term life insurance and universal life insurance is that universal life is a permanent policy. Its purpose is to provide coverage for your entire life.

In universal life (UL), you apply the same calculations to the premium as you do in term, but instead of taking an average over 10, 20 or 30 years, you pay the average price to insure yourself to age 100+.

In addition, term has no cash value. If you cancel a term policy, nothing is returned to you.

The three main ingredients that make up Universal life are:

1. Death Benefits

You basically have 2 options to choose from when deciding how you want death benefits to be paid to your beneficiary:

• Type A Death Benefit or Level Death Benefit: You can choose a level death benefit, that starts off as one amount and stays level for the life of the policy, regardless of cash value.  (known as “level death benefit” or “death benefit type A”).
• Type B Death Benefit: The other option is a combination of a specific death benefit plus the cash value accumulation feature which builds over the life of the policy.

2. The Cash Accumulation Portion

A portion of your premiums is allocated by the insurance company into a interest crediting strategy of your choosing.

One popular vehicle, called indexed universal life insurance, allows you to participate in the gains of a major stock index, such as the S&P 500, with no risk of principal loss. You are guaranteed a specific rate of return in many of these strategies, regardless of how well the market does.

3. Flexible Premiums

The big difference between universal life insurance and a term life policy, is that with universal life the premiums can be paid as the policyholder desires, as long as sufficient cash values are present to pay of the cost of insurance.

With a term life policy, you can’t change the premiums to suit your economic situation.

With universal life insurance, the premiums are flexible and can be paid as the policyholder desires.

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Do you Really Need Lifetime Coverage?

Pssst.  Come close.

I’m going to tell you something most agents who live off of commissions won’t.

… you probably don’t need permanent life insurance.

In my experience, most people I work with in their 40’s or 50’s are planning for retirement by paying down their debts, and investing for the future.

If you’re considering UL, ask yourself why you might still need life insurance over  70 or 80?  Will you still need life insurance then?  I sure hope not.

There are a couple instances when lifetime coverage is appropriate, such as for estate planning or charitable giving, and in those cases, sure, it makes sense to buy some guaranteed universal life.

Other than that, most people can get by on term.

However, if you do want lifetime coverage, you can get a custom tailored universal life quote by calling 888-603-2876 or using our quote form and selecting the lifetime option.

We have several carriers like:

• North American
• American General
• Protective
• Transamerica

All offer various forms of universal life. We prefer the guaranteed form, which offers a guarantee your policy will not lapse as long as you pay your premiums.

Note: If you’re looking for universal life insurance, many companies, as seen in our Select Quote Review, specialize in term, and may not offer every form of UL.

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Universal Life as an Investment

One of the buzzwords in the life insurance world is universal life. A lot of agents are pitching it as an alternative to a 401k.

… Is that a good idea?

Now that I’m in my tenth year selling life insurance, I’ve had my fair share of sales where a client told me they were already maxing out their 401k and IRA, and were looking for another place to invest their money.

Due to some tax advantages of cash value life insurance, universal life has historically been one resting place for funds looking for a home.

In other words, maybe you’re not interested in lifetime insurance protection but are seeking life insurance as an investment.

I’m very familiar with this world and personally own a UL for its cash value build-up. Here are my thoughts:

How Universal Life as an Investment Works

When you pay your annual premium, a portion of that goes to the costs of the policy.

Anything left over will be directed into whatever interest crediting strategy you elect.

Most companies have guaranteed interest strategies, non guaranteed strategies set by the company, or non guaranteed strategies whose performance is somehow tied to an equity index, such as the S&P 500.

The benefit to universal life over whole life is flexibility.

Using the Cash Value for Other Purposes

Most financial planners agree that life insurance should not be looked at as an investment.  However, thousands of individuals have used life insurance over the years to fund college planning needs, retirement planning, and even as makeshift pension plans.

I used to read a lot about using life insurance for cash accumulation, and to be honest, now that I’ve sold some of these and seen the performance over the years, I don’t have strong opinions either way on using universal life as an investment.

What Dave Ramsey Says about Investing in Universal Life

Many reputable financial advisors agree that investing in universal life insurance isn’t always a great deal.  Learn what Dave Ramsey thinks.

His key points are:

• When you combine life insurance and investing together, the investment never performs well
• the insurance is very expensive
• you’re better off buying term insurance and doing your investing separately

Bottom line:

Universal life as an investment sounds good, in theory, with tax advantages and some of the creative interest crediting strategies available (especially the indexing strategies)…but the performance of the policies I’ve written hasn’t been great.

Case Study

Let’s review the case of one client of mine who is now 44 years old.  He opened up his universal life contract in 2006, so as of the posting of this article, we had 6 years of history.

He funded the policy with $17,000, and his current account value at that time was $15,828, minus the surrender charge (which equaled a net surrender value of $14,652).

In this case, we structured the policy for max-cash dump in, and minimum face value, with the goal of getting the policy costs as low as possible.

When you add his 3 costs together (premium expense fee: $100, policy expense charge: $406.44, Base cost of insurance: $46.25) they come to over $500 per year.

It makes sense that it took a while to make interest here, but now that he has funded it for several years, I believe we’ll start to see his accumulation value catch up to and surpass his premium outlay.

I, myself, purchased a UL policy several years ago and admittedly did not max-fund it, but came close. Unfortunately, I have been disappointed with my returns as well.

For several years I paid over $200 per month into my policy, with only around $100,000 death benefit, and several years later, I’ve only broken even.

I could have bought a 1 or 2 million dollar term life insurance policy instead for way less than $200 per month and invested the difference.

I guess I’ll have to take a lesson from my client above.

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Next Steps for Purchasing Your Universal Life Policy

We cannot stress enough the importance of life insurance in your life.

Independent agents have access to multiple companies and we know which insurers offer the best rates when it comes to obtaining universal life insurance.

If you have any additional questions or would like a free, no-obligation quote, feel free to give us a call at 888-603-2876 or you can use the Instant Quote Box on the upper right-hand side of this page.

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